Thursday, May 8, 2008


John McCain and Hillary Clinton have done something amazing. They have discovered the world's only bad tax cut. OK, a political pollster actually discovered it, but McCain and Clinton have publicized the find for him.

The plan is this: remove the gas tax over the summer, to relieve strained consumers.

The result is this: gas companies get rich at the expense of taxpayers.

Some explaining is called for here.

The important thing to know is that the supply of gas, over the course of the summer, is already set. Gas companies don't have enough time to build new refineries and do the rest of the work that would be involved to get more, so the supply will not change. In other words, the supply curve looks like this:

Tax cuts push demand up. Prices, thanks to the tax cut, are lower, and people react by going on shopping sprees, in this case at the gas pump.

But this can't be good— supply and demand are already at an equilibrium (this is what markets do) so what happens to all the extra demand? The supply can't change, so that can't fix it.

This is what happens to the extra demand:

See the intersection of the blue and gray lines? That's the market equilibrium. That is what the price and quantity of products sold will be in a competitive market. When the demand is pushed upward by a tax cut, and the supply is inelastic (rigid, unchanging, vertical), sellers respond by raising prices the exact same amount. They have to, or they would run out of gas to sell.

This is why no economists agree with McCain or Clinton.

Clinton, for her part, doesn't trifle with little things like economics: "I'm not going to put my lot in with economists." She'll make the government chase it's own tail (replace one tax with another) if she damned well pleases.

And McCain is even worse. He doesn't seem to mind giving tax money to gas companies. (Hey, it's not like he's got any wars to fund.)

Also, both McCain and Clinton have received large campaign donations from oil companies. Coincidence? Probably.

This is a good point at which to sit back and reflect. There's a 2/3 chance (3/4, if you figure it as two separate races) that an utter dimwit will soon be our president. If you haven't already lost faith in democracy, now is the time to do so.

(If you're having a tough time with the graphs, here's a textbook that will help [look under the section "Many vs. Many"]. It's not very complicated, I promise.)

By the way, I am now endorsing Barack Obama. He is the world's only major presidential candidate with a brain, which is amazing.

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